Best Practice: Utilizing Shared Information to Prevent Fraud

Fraud is like a balloon. When you squeeze one end, fraud (like air) simply migrates or moves to other areas. Rather than just pushing fraud elsewhere within your institution or to other banks and credit unions, we can use shared information to essentially `pop' the balloon to help mitigate fraud losses. Credit unions are becoming more aware of an accepted best practice of using shared information to protect not only themselves from fraud losses, but also the members they serve. For the past 10 years, financial institutions have been continually expanding a nationwide initiative to mitigate this growing problem of identity fraud and deposit losses. While banks and credit unions are competing directly with each other to win market share, most now understand these competitive differences are immaterial when it comes to fraud. Counterparts from both camps are simultaneously hosting regional and national events to exchange best practices and find ways to reduce losses for the industry as a whole. I'm sure we have all heard the expression, "Fool me once, shame on you; fool me twice, shame on me." It aptly describes the challenge we face. We may not be able to avert an initial loss due to a new method or scheme, but we can certainly develop systems to prevent offenses that are often copied or repeated. You Can't Manage What You Don't Measure Before you can avoid losses, it is important to know where they originate. We frequently hear from credit unions that they don't incur fraud losses. In reality, they actually do, as losses are simply hidden elsewhere. Among surveyed institutions, an individual branch or operations group will often write off losses to "NSF general ledger accounts." We have found this to be the primary cause for the common misperception, "We don't have losses." If this scenario occurs at your credit union, take a moment to review your general ledgers to determine if some of these write-offs should be reclassified. Additionally, a closer look at your current investigation queues and collections departments can also help uncover losses. The Banking Industry Technology Secretariat (BITS) is an affiliate of CUNA. Founded in April 1998, the BITS Fraud Working Group is chartered with creating a nationwide program to reduce check fraud, primarily by exchanging information through shared databases, the exchange of best practices, and implementing standard industry fraud definitions and benchmarks. At its core, BITS has identified shared, non-public information on accounts, transactions, and people as a best practice. This business model, proven successful over the past 10 years, is built on the following guiding principles: * Maintain current data that provides a full positive look at transaction accounts * Employ strict operating rules to govern data provision, ownership and use * Provide revenue sharing for contributors whose data results in value to others. Numerous financial institutions and other financial service organizations leverage contributed information contained within the National Shared Databases. Rather than relying on public consumer data, these databases consist of non-public secure information representing: * An estimated 90% of all open and active transaction accounts * Nearly 80 million closed and purged accounts * Over 18 million stop payment records * Return-item decisions on nearly half of all U.S. checks returned annually * Identity information used during known or attempted fraud schemes * Consumers who have caused losses and had their account(s) closed for non-payment at financial institutions. By delivering timely information, financial institutions can serve a critical role in mitigating deposit losses while helping accelerate funds availability. However, while large financial institutions are detecting and preventing losses, fraudsters have begun shifting their attention to other financial institutions such as community banks and credit unions. For many, exposure to return item losses and counterfeits is on the rise - and will likely persist with the enactment of Check 21. It will likely take years for most banks and credit unions to fully adopt image exchange throughout the entire presentment and return process. Technology costs can be significant and vary greatly by financial institution and processor. Check imaging, transportation, archiving, printing and backroom operations must be reengineered to fully integrate image clearing and settlement systems. Until the day when all institutions become fully image-enabled, when and if this ever happens, there will likely be a mix of image, substitute check and traditional paper that may in some cases expand the processing cycle by one or more business days for those items affected. While image exchange will potentially help fight fraud by shortening the clearing and return timeframes, it is highly unlikely to eliminate fraud. Based on past experience, fraud attempts will not likely diminish, but migrate elsewhere in search of the path of least resistance. The recently released 2005 ABA Deposit Account Survey reported that, while actual losses have remained relatively flat, attempted check fraud against commercial banks' deposits continued to rise - reaching $5.5 billion in 2003, up from $4.3 billion in 2001. What Can I Do? While there is no silver bullet to mitigate all risk, a number of available services leverage shared databases to reduce losses and help protect you from becoming the next victim. In addition, there are security tools available that can be used to combat fraud schemes such as phishing. Take the time to learn more on how you too can benefit, and consult with reputable organizations. Let's continue to work together to `pop' that fraud balloon.